Does Main Street Capital's Dividend Still Come Out of Earnings, or Out of the Balance Sheet?

Main Street Capital (NYSE: MAIN) is a business development company (BDC). Its 7.5% yield is well above the market's roughly 1%. But there are some issues to consider before you buy this stock. And the biggest comes down to how the dividend payment is made. Here's what you need to know.

What's Main Street's real yield?

Some online quote services will show Main Street's yield as 5.4%. Which isn't wrong, because the monthly dividend is $0.265 per share. If you multiply that number by 12 and divide by the recent stock price, you get roughly 5.4%. But Main Street has also paid an additional $0.30 per share in dividends each quarter in 2026. That same amount was paid every quarter in 2025 and 2024, as well. If you add that quarterly payment to the monthly dividend, you get a 7.5% yield.

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Main Street describes that extra payment as a supplemental dividend. It is paid out of "undistributed taxable income." While it has been reliably paid for several years, you can't count on it. The big-picture story here is that this business development company funds its regular dividend with the interest income it earns from loans to smaller, non-public businesses. In the second quarter, the company generated distributable income of $1.04 per share, easily covering the $0.795 per share in regular dividends it paid.

From this perspective, the dividend is fine. But what about the supplemental dividend? That will get lowered if there are headwinds. For example, during the COVID pandemic in 2020, no supplemental dividends were paid. Making loans to smaller, non-public companies is inherently risky, so an economic downturn could very easily lead the company to pull back on the supplemental dividend or eliminate it altogether. Recessions often result in an increase in troubled loans for a BDC.

Main Street's business model has two parts

What's interesting is that Main Street's dividend is similar to its business: it has two parts. The regular monthly dividend is funded by the interest income generated by its loans. There is plenty of leeway for adversity before that dividend would be at risk. The supplemental dividend is best understood as arising from the gains the BDC earns on equity stakes it takes when it makes a loan.

This is a normal part of the company's business and a bonus for Main Street if the investment works out well. The BDC is simply passing on its success to investors through the supplemental dividend, which you can think of as coming out of the balance sheet. Main Street's approach to its dividend is actually quite conservative. And if you understand what it is doing, you'll likely find the stock an attractive addition to your income portfolio. Just go in knowing that the supplemental dividend can't be counted on.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.